Citi hikes Spirent Comunications target price, adds M&A premium

Spirent Communications's risk-reward profile justifies the current premium embedded in its valuation, more so given that markets may begin to factor-in the possibility of a take-over, Citi analysts said.

Analyst Rahul Chopra upgraded his recommendation on the stock to 'buy' and hiked his target price from 90.0p to 145.0p after revising his profit estimates, lowering his estimate of the carrier's weighted average cost of capital and incorporating a "modest" 10% premium for potential mergers and acquisitions.

On the heels of the recent merger between Ixia and Keysight, Spirent's quality business and favourable exposure to end markets may see it fall into the crosshairs of a potential buyer, Chopra said.

Assuming the 11.5% margin on testing companies' acquired multiples Chopra estimated 32% upside for the company's shares and 76% under a 'recovery' scenario which incorporates margins of 15.7%.

Downside risk on the other hand was 19%, he said.

"Whilst current multiples are at a premium to history, we believe this premium is justified given the optionality for strong rebound in earnings."